Nokia Is On Line 1- But Is It Cheap?

While watching Mad Money today, everybody’s favorite loudmouth took a call on Nokia. The question was about whether Nokia was an “accidental dividend stock” because it had sold off so much. Jimmy Creamer didn’t like it much, mostly because it had just cut it’s dividend. (More on that later) When CNBC put up the chart, I was absolutely shocked at how cheap Nokia had gotten. Check out this 5 year chart:

The stock is flirting with the lows of 2009. Is it a buy at these levels?

Why Is It Cheap?

Operations have been tough over the past year. Earnings for fiscal 2009 dropped to a fraction of what they were in past years. The market for handsets was weak, upgrading their cell phone is one thing people can wait to do most of the time. They are also getting their butts kicked in the smartphone market in North America by RIM and Apple, among others.

Industry Outlook

Wireless is hardly going away, with the industry returning to an annualized growth rate of 10% by the end of 2009. Nokia led the way with a market share of 39.1%, down a bit from their usual spot at 40-41%. That decline can be attested to the lack of smartphone sales.

Dividend

This is the reason why I hate Jim Cramer. Dividends get treated a little differently in Finland as they do in North America. What Nokia’s board does is looks at results for the year, then declares an annual dividend. They pay once a year, unlike most North American companies. 2009’s dividend was 0.40 Euros.

Balance Sheet

Market cap checks in at a hair over 37 billion. Nokia’s book value is $3.77 per share, which means the company trades for 2.63 times book value. The average for the sector is 1.63, however this includes all sorts of other communications stocks. From a quick glance at their direct competitor’s balance sheets, (excluding Apple) Nokia does trade at a discount to its peers.

Debt is a bit of an issue for Nokia, currently it sits at a hair above 4 billion. Most of the debt was taken on to finance the acquisition of Siemens last year. Debt is hardly excessive for a company this size.

Earnings (in Euros)

2006-1.05

2007-1.83

2008-1.05

2009-0.24

Earnings are not heading in a positive direction. Analysts are expecting earnings of around 90 cents for 2010, putting the company at 11 times forward earnings.

Price Appreciation

As mentioned earlier, the stock is close to levels last seen during the market collapse of 2009. This is easily a 10 year low. An increase in price to the low 20s wouldn’t be out of the question, considering the stock spent considerable time at that level over the 2005-08 period, before shooting up to a high of around $40. Upside is a little more than 100%.

Summary

Nokia is a dominant player in the global handset market, especially in the fast growing areas of China and India. They are a world class company that stumbled as the handset market slowed. They are getting hammered in the smartphone market by competitors who do an awful good job of making good phones. If they come out with a smartphone that actually catches on in North America, this stock could end up looking like a fantastic bargain at these levels. I put the chances of that pretty low though.

If you’re a believer in the Euro continuing to sell off, this will act as an additional lift on the company’s bottom line. Every cent the Euro falls against the other currencies, the better it is for Nokia’s bottom line. I’m not smart enough to make that call, perhaps you’d like to make a prediction for me.

Nokia may be added to the Uproar Fund when it launches in a couple of weeks. Or it may not. Stay tuned.